Posted by: Daryl & Wendy Ashby | December 30, 2010

How to Avoid a Tax Audit

Most of us wait till the 11th hour to file our income tax returns, but it’s worth getting a head start on them now. We explain how to send in the best return.

1. File on time 

“You don’t want to file too early or file too late, either,” Ryan Rawluk, certified general accountant with Winnipeg-based Nicholson Rawluk LLP, says. “[Accountants] prefer March. A lot of people, it seems to be something they definitely don’t want to do and not their favourite time of year so they put it off as long as possible.”

If you file past the April 30 deadline, you’ll have to pay interest on any tax owed, but filing late could also increase your odds of being audited, he explains.

On the flip side, filing too early can be a problem if you don’t have all your documents. T3s (for income trust holdings) often aren’t available until the end of March, so it’s worth waiting for all the necessary slips so you don’t have to follow up with an adjustment.

2. Keep track of your receipts 

Revenue Canada employees will usually notice any deviations from your usual year-to-year filings, so make sure you have documentation to account for them, Mr. Rawluk says.

One of his clients worked for a company that was bought out. He received a large sum of money, most of which he put into his RSP to avoid taxation. In the past, he’d only claimed $1,000 or $2,000, so a $30,000 claim was out of the ordinary and flagged.

Other examples that might stand out: Your child needed braces, or you donated a few thousand to a relief organization.

3. Stay on top of new deductions and credits 

Mr. Rawluk notes that various new credits have been introduced over the past few years – including ones for transit passes, children’s fitness and home renovation – so it’s worth getting a head start on your taxes so you don’t miss any of them.

Individuals should think about filing as an entire family unit to take best advantage of all the available deductions and credits, says Evelyn Jacks, the Winnipeg-based author of the Essential Tax Facts book series and president of Knowledge Bureau, a financial education institute. Students can transfer tuition, education and book amounts to a supporting spouse, parent or grandparent. Medical expenses for one individual can be transferred to a supporting earner.

Most people are unaware of what can be claimed as a medical expense, too, she says.

“It would pay off to learn a little more about what’s claimable. People with celiac disease can claim what it costs them [more] for gluten-free bread than it would for regular bread.” A full list can be found by searching for “medical expenses” on the Canada Revenue Agency website.

4. Beware of investment and donation schemes  

While Mr. Rawluk encourages taxpayers to make sure they take advantage of deductions and credits, he warns against any that seem too good to be true – because they usually are.

“There are a lot of investment and tax schemes that are taking place such as the buy low, donate high where maybe you put in $5,000 and you get a donation receipt for $30,000,” he says.

Such claims are red flags on tax returns, he says.

“Most of them are being audited by Revenue Canada and most of the people who take part in them end up having to pay back their refunds along with interest and penalties,” he says.

*And don’t do this 

Submit your tax returns without triple-checking your math. You’re better off using software than a pen and calculator for greater accuracy.

A few numbers worthy of note:

299: the number of people convicted of tax evasion or tax fraud in Canada in 2007-2008

$10,000: upper limit for home renovation expenses eligible for the Home Renovation Tax Credit

9,905: Quebeckers assessed by Revenue Canada in 2009 for failing to file their tax returns

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